Archive for 'Market Designs'
The Probability Estimate Prediction Market
Prediction markets may take many forms, and some of the designs for prediction markets that this book considers might not merit being described as markets at all. The term prediction market, however, is descriptively accurate at least as applied to the design most prevalent today, which I call the “probability estimate prediction market.” As the […]
The Numeric Estimate Prediction Market
The prediction markets illustrated so far are designed to predict probabilities, but sometimes it is useful to aggregate individual predictions of numbers that are not probabilities, for example, how many games the New York Mets will win this year or how many people in Love Canal will die of cancer over the next ten […]
Subsidized Markets: Introduction
One reason that prediction markets sponsored by TradeSports do not necessarily reflect the predictions that could be made by the most sophisticated models is that TradeSports charges commissions. These commissions, we have seen, are small, but they compound the inherent risk of investing in prediction markets. The best strategy for prediction market investing could go […]
A Decentralized Subsidy Approach
A decentralized strategy for dispersing the risk assumed by market makers would borrow from the TradeSports policy of offering lower commissions to traders who make bid or ask offers that are later accepted. One possibility is to distribute a fixed subsidy to traders who offer the most generous bid and ask prices, in proportion to […]
Legal Markets
As long as prediction markets remain illegal in the United States, U.S. policy analysis organizations’ options are considerably restricted, but there might still be some means of taking advantage of the information aggregation power of prediction markets. One approach is to enter into a contract with an organization abroad that runs prediction markets. I know […]
The Dynamic Pari-Mutuel Market
Prediction markets for business also must overcome a much more practical problem: ensuring that markets have enough liquidity–that is, enough individuals who are willing to trade–to enable those who have or could develop information to trade on that information. It would be hazardous to extrapolate from the success, say, of TradeSports and infer that prediction […]
The Subsidized Dynamic Pari-Mutuel Market
An additional technical challenge is the combination of the market with a subsidy mechanism for cases in which a subsidy is desired. Note that simply placing the subsidy in the pool, to be allocated among the winning shares, will not do. That would give individuals an incentive to invest simultaneously in both market outcomes, possibly […]
The Market Scoring Rule
Of course, scoring rules themselves must be compared against other means of eliciting forecasts. Whereas the Delphi Method seeks to maximize information-sharing and collaboration, a scoring rule seeks to elicit the best possible forecast from a single forecaster. Prediction […]
Deliberative Prediction Markets
When one prediction market is used to predict the outcome of another, participants who have private information in the first prediction market have an incentive to reveal that information to participants in the second. Suppose, for example, that a participant in the two-stage prediction market discussed immediately above were to obtain secret information that the […]
The Nobody-Loses Prediction Market
A variation on the market scoring rule might help with the fraudulent information problem, and more important, with the type of manipulation that we have seen can pose problems for prediction markets that rely entirely on points that can be exchanged for dollars. In this variation, a central computer can limit the amount by which […]